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Tariff Talk

One economic factor with potential to impact the foodservice industry is a series of tariffs imposed by the U.S. on goods made overseas.

The initial tariffs took effect in April and immediately raised the prices of aluminum and stainless steel, two key ingredients when making foodservice equipment. “And that caught everyone’s attention. It demonstrates that materials costs are going to rise, and the cost of finished products will rise,” says Charlie Souhrada, vice president, regulatory and technical affairs for the North American Association of Food Equipment Manufacturers (NAFEM).

The next round of tariffs were announced this summer and are designed to protect intellectual property and the high-tech interests in the U.S. These tariffs impact three different types of products: material inputs and component parts, tools used to make equipment and consumer goods coming from China. This round of tariffs includes items like polymers, resins, hoses and other items that factories use to manufacture foodservice equipment and supplies, Souhrada notes.

In addition, the amount of the tariff can vary by item. “It lends yet another level of overhead where manufacturers need these items to make their products. That’s why dealers, reps, operators and consultants should pay attention to this. The tariffs represent additional expense to produce these products,” Souhrada adds. “In many ways, it represents a supply chain challenge. Many of those items are available from other suppliers but NAFEM members rely on a very complex supply chain system that is integrated. It took years to build and it may take years to rework. But when you factor in the increasing steel and aluminum prices and rising freight costs, it makes it only more difficult for manufacturers to compete.”

E&S Impact

How manufacturers of foodservice equipment and supplies will address the tariffs will likely vary by company. Some may choose to absorb the additional expense for as long as they can. Some may choose to pass them along immediately.

In an attempt to get ahead of this, some factories are discussing the tariffs with their rep networks to determine when to increase prices and by how much to offset the costs. Others have already raised prices. “Some manufacturers have been very fair,” says Jonathan Gustafson, director of purchasing and strategic sales for Ace Mart Restaurant Supply, San Antonio, Texas. “In some cases where we know the tariff is 10 percent, the factories are pushing through a 3 percent to 4 percent increase. In other instances, we are seeing some price grabs.”

In lieu of price increases, some manufacturers have established a surcharge on shipments after a certain date, adds Joe Ferri, a principal at Pecinka Ferri Associates, a New Jersey-based independent manufacturers’ rep firm. “The law of unintended consequences is certainly taking hold with profiteers doing what they do best,” he adds. “It’s created a lot of disruption and ill will.”

While this may seem like a manufacturing issue at the moment, the implementation of these tariffs could have a ripple effect throughout the industry. For example, higher equipment costs could impact operators’ budgets for replacement purchases, remodels and more. “We are seeing that on some projects,” says Jeff Couch, principal at Preferred Marketing Group, a California-based independent manufacturers’ rep firm. “With the chains who are remodeling and franchising, this is throwing their budgets out of whack.”

As a result, operators may need to brace for equipment and supplies costs that will be greater than the typical 3 percent to 5 percent most manufacturers implement on an annual basis. “Some customers are aware of this and want us to start exploring other options so they don’t get hit with a 20 percent increase,” Gustafson adds.

This comes at a time when operators face significant cost pressures related to other aspects of their business, including labor. “Mini wage increases are taking hold across the country and they are starting to look at that,” Couch says. “Now the equipment they are looking at is inflated by a certain percent and they have to weigh what to do.”

Additional Impact

The tariffs could impact more than just the cost of new equipment. They could impact the cost of parts service agents use to maintain and repair existing equipment. “If raw materials are going up, then you can expect to see price of parts going up,” says John Schwindt, general manager and vice president of operations for Hawkins Commercial, a Colorado-based service agent. Schwindt also serves as president for the Commercial Food Equipment Service Association.

“Bottom line is we are bombarded with price increases literally every week,” Schwindt says. “Every once in a while, one will go down. Every time you order a part, prices are always subject to change depending on demand. Prices have been going up. Everyone wants to improve their margins and they will use this as an excuse to raise prices.”

How will the tariffs affect the industry over the long haul remains anyone’s guess. “There’s lots of uncertainty because we don’t know how it will end,” Couch says. “You are not laser focused any more. You are more shotgunned in your approach because there’s so much uncertainty. We are all talking about it but there’s so much uncertainty. Nobody’s really moving forward. You hear the economy is humming along but I don’t see a real building boom anywhere in my area.

“With the tariffs there’s a trickle-down impact that affects a lot of people, regardless of whether they are tied to steel,” Couch says. “Then there’s all the other tariffs that go on that affect other businesses that don’t allow consumers to spend more money at restaurants. If your costs go up then your disposable income changes. Because the announcements are not done yet, nobody knows exactly what it means yet.”

Stay tuned.